Breaking an FD Early? Know the Costs Before You Decide

Fixed Deposits are considered stable and straightforward savings options. They offer fixed returns for a chosen period, and the money stays secure throughout the tenure. However, life is unpredictable. Sometimes, you may find yourself needing to withdraw your funds before the fixed deposit matures. While this is allowed, it’s important to understand the possible costs and conditions that come with early withdrawal. Let’s explore what it means to break an FD early and what you should know before making the decision.

What Is Premature Withdrawal of a Fixed Deposit?

Premature withdrawal refers to closing a fixed deposit before the completion of its original term. You may need to do this due to a medical emergency, an urgent financial requirement, or an unexpected opportunity. Most banks allow early withdrawal, but it often comes with certain deductions or lower interest payouts.

How Interest Payouts Are Affected

When you break an FD early, the biggest impact is usually on the interest earned. While you may have booked the deposit at a higher rate, banks typically pay interest based on the rate applicable for the actual period your money was with them.

For example, if you opened a one-year FD at 7 percent but broke it after six months, the bank may apply the six-month FD rate, which could be lower. This adjustment ensures that the interest paid matches the revised tenure.

Early Withdrawal Penalties

In addition to the reduced interest, banks may also charge a penalty for early closure. This is usually a small percentage deducted from the applicable fixed deposit interest rate. The exact deduction depends on the bank’s policy.

It’s worth noting that this penalty is not charged on the principal amount. Instead, it is deducted from the interest that you earn. This means your final payout could be significantly lower than what you had expected at the time of booking the deposit. Before taking any decision, you must contact the respective institution.

Special Cases: Senior Citizens and Certain FD Types

Some fixed deposit types offer more relaxed rules for early withdrawal. For instance, senior citizens may receive better terms. A few banks, including IDFC FIRST Bank, offer zero penalty on premature withdrawal for senior citizens. This can be a helpful feature, especially when funds are needed urgently during retirement.

Other types of FDs, like Flexi FDs, may also provide easier liquidity. Since these are linked to savings or current accounts, they often allow partial withdrawals without breaking the entire deposit.

Planning Before Breaking an FD

Before you break your FD, consider these steps:

• Check your bank’s early withdrawal policy

• Compare the reduced interest with other available options

• See if a loan against the FD is available instead of withdrawing

• Check if a partial withdrawal is allowed for your FD type

Understanding these aspects can help you avoid financial loss and make better decisions in times of need.

Conclusion

While fixed deposits are built to be held until maturity, emergencies may require you to access your money early. It’s important to understand how premature withdrawal can affect your returns. Reviewing the revised interest rate and possible penalty can help you weigh the cost of breaking your FD. In some cases, using alternative options like loans against FD or partial withdrawal may serve you better. Knowing your bank’s terms, especially for specific FD types like senior citizen or Flexi deposits, can give you more flexibility without added stress.